“Irrespective of market levels, at every point in time there will be companies which will be relatively undervalued and our portfolio will reflect some of these new ideas, if they meet our framework of great business,” she says.
Edited excerpts from a chat:
How have you been tweaking your portfolios in the last few months amid all the concern around valuation and earnings growth slowing down?
The recent dip in macro data could be attributed to higher-than-average monsoons in August and September, some slowdown in government spending, and calendar shifts in the timing of inauspicious and festival periods. Thus, is likely to be transient, as a matter of fact, global agencies such as the IMF continue to project a healthy GDP growth for India over the next few years.
We view macro as a source of risk, from which we try to shield the portfolio’s relative performance rather than seek any opportunity to generate alpha. Irrespective of the underlying market scenario, we believe it is prudent risk management approach to maintain a balanced portfolio with an aim to ensure that performance is a function of stock selection capabilities of the team rather than being driven by non-stock specific macro risk factors such as market timing, sector, currency or other such factor exposures. This balanced approach aligns the risks in the portfolio with our bottom-up philosophy and process.
There has been a bit of correction in the last few weeks. Are you using it to increase allocation and buy some of the stocks available at relatively attractive valuations?
From a prudent risk management perspective, we stay fully invested at all times with a bottom-up approach to investing in great businesses at attractive valuations. This does not imply a passive buy and hold approach but an active assessment of opportunities. Irrespective of market levels, at every point in time there will be companies which will be relatively undervalued and our portfolio will reflect some of these new ideas, if they meet our framework of great business.
Our sector exposures reflect our rigorous bottom-up stock selection process. At present the team finds more opportunities within Private Financials, Consumer Discretionary, Industrials, Healthcare, and Communication Services.How bad do you think is the Q2 earnings season as a large number of NSE 100 companies have delivered disappointing numbers?
2QFY25 earnings season has been a tad disappointing on aggregate basis even factoring in the modest expectations. Commodities was a drag, especially the performance of downstream companies due to weaker refining margins. Consumption oriented sectors also reported a weak set of numbers, underlined by pressure on margins. Within the financials, the banking sector reported decent credit growth. Margins and asset quality remain broadly stable (except for the MFI book and credit card to some extent). Results of IT Services companies suggest a gradual demand recovery with few companies increasing their guidance. The Capital goods sector in general reported a decent quarter, notwithstanding the weak government spending seen in Q2FY25.
Is most of the earnings downgrades already factored in the price or more pain is there in the offing?
Prior to the recent correction, there were many segments and individual names within the mid and small caps that seemed to price in excessive optimism with stock prices extrapolating cyclical trends as secular. Some of these names have seen a correction although downside risks still remain given the still elevated expectations.
PSU banks have stood out in the earnings season. Investors are also hopeful on IT and pharma but consumption has taken a hit as a theme in the near term. What is your sectoral outlook after the Q2 earnings season?
PSU banks had a good quarter but some of the beat on earnings could have been led by one offs such as high recoveries. While there are no major concerns from an asset quality perspective, earnings growth seen in the last few years is unlikely to be replicated.
As stated earlier, our sector exposures reflect our rigorous bottom-up stock selection process. At present the team finds more opportunities within Private Financials, Consumer Discretionary, Industrials, Healthcare, and Communication Services.
The market has reacted positively to PSU bank stocks following an impressive show in Q2. What are your thoughts on the earnings momentum and whether they can outperform private peers in the next 6 months?
While credit costs have eased significantly for the sector, in our prior experience, well run private sector banks tend to gain market share whenever the regulatory environment tightens. While not taking any top-down view on the segment, we continue to focus on well run names both within PSUs and the private sector. Given where relative valuations are, we find more opportunities within the private sector banks.
Do you see chances of recovery in consumer demand beginning from December quarter? Early signs during the festive season has been encouraging.
Consumption recovery is likely to be uneven with management commentary suggesting higher volume growth for 2HFY25 in select segments such as jewelry, retail & apparel, paints, and aloc-bev. Other categories may continue to witness a more gradual recovery. Rural demand appears to be gradually improving, reflected in the higher 2-wheeler and tractor sales for October. Passenger vehicle sales continue to be weak.